Asian shares retreated on Wednesday as hopes for fresh measures to tackle euro zone debt faded and caution set in ahead of a meeting of European leaders, with renewed fears Greece would leave the euro bloc dampening appetite for riskier assets.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.7%, after rising 1.1% for its biggest daily gain in almost two months on Tuesday and recovering from a 2012 low hit on Friday.
Japan's Nikkei stock average opened down 0.2%. Bank of Japan Governor Masaaki Shirakawa is due to hold a media conference later on Wednesday after a two-day policy-setting meeting.
Investors will also be watching whether European leaders can come up with fresh measures to contain the euro zone's debt crisis as the problem escalates from concerns about a Greek exit to Spain's banking instability.
European Union leaders are expected to discuss later on Wednesday the idea of regional bonds jointly underwritten by all euro zone member states. New French President Francois Hollande supports the proposal but German Chancellor Angela Merkel is opposed to it.
"We doubt that Wednesday evening's EU summit will result in many ground-breaking concrete agreements," Barclays Capital analysts said in a research note, adding that European policymakers have agreed to put more weight on growth but have not formed a consensus on how to achieve it.
"It seems unlikely that market confidence will return until there is more visibility about developments in Greece, and Europe more generally," they said.
The Aussie dollar touched a six-month low around $0.9762 on Wednesday as investors dumped riskier, higher-yielding assets over fears of a Greek exit from the euro.
The euro fell 0.2% to $1.2657, nearing a four-month low of $1.2642 touched on Friday when concerns about Greece were compounded by mounting banking stress in Spain.
Greece's bank stability fund approved an 18 billion euro injection to recapitalise its four largest banks on Tuesday, allowing them to again tap funding from the European Central Bank, which cut off some Greek banks last week because they lacked enough capital to be considered solvent.
Markets, however, could see some support from positive news from the world's two largest economies.
Data on Tuesday showed sales of existing US homes rose to their highest annual rate in nearly two years in April and foreclosures fell to push housing prices higher.
Hopes also rose on Tuesday China would lift fiscal stimulus, as well as pursue monetary easing, to underpin growth after a Chinese media report that Beijing would speed up infrastructure investments, boosting Chinese and Hong Kong shares.
Market reaction was muted on Tuesday after Fitch cut Japan's long-term foreign currency rating to A plus from AA as well as the local currency rating to A plus from AA minus, with a negative outlook for both. It said a political stalemate was dimming the chances for Tokyo to curb its snowballing debt.
Japan's five-year dollar-denominated cost of protection widened slightly to 107 basis points from bids at 105 bps before the announcement. Japan's CDS level is still very tight in light of the country's fiscal risks, but it is unlikely to change and European debt events will remain much bigger market movers for now, analysts say.
Asian credit markets were slightly weaker early on Wednesday, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by two basis points.
Fitch's ratings announcement helped the dollar firm slightly against the yen. The dollar held above 80 yen on Wednesday but showed muted reaction to Japan's trade data.
Japan's exports rose 7.9% in April from a year earlier, the biggest gain in more than a year, Ministry of Finance data showed on Wednesday, helped by a recovery in overseas demand.
A weak euro weighed on spot gold, which is struggling to break above $1,600 an ounce.
Oil was soft, with US crude down 0.3% at $91.54 a barrel and Brent down 0.3% at $108.13 a barrel.
Oil prices fell on Tuesday as signs of a deal between the U.N. nuclear watchdog and Iran on Tehran's nuclear programme eased fears of supply disruptions, while Europe's debt woes continued to threaten economic growth and dampened demand outlook.
